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What is one condition necessary for price differentiation to be effective?
Absorption target pricing includes both variable and fixed costs.
True
What formula represents absorption target pricing?
VC + FC + NP
Price differentiation aims to maximize _______ in different markets.
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In the example provided, what was the variable cost per chair?
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In absorption target pricing, NP represents _______.
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How much did the Green Spiders buy each soft drink for?
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Match the following pricing terms with their descriptions:
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What is a disadvantage of absorption target pricing?
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Marginal cost pricing can lead to lower prices when there is unused production capacity.
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What is the definition of marginal cost?
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Absorption target pricing is advantageous if your costs are _____ as a business.
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Which situation typically leads to an increase in the price under marginal cost pricing?
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Match the pricing strategy with its description:
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What is a potential consequence of high costs when using absorption target pricing?
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What does the variable pricing strategy primarily involve?
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A business can benefit from absorption target pricing even with high sales estimates.
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Price differentiation means setting the same price for all market segments.
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What strategy would you use to increase the price of a product when demand is high?
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Variable pricing can be used to _____ the price when there is an urgency to offload inventory.
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Which of the following is NOT a strategy for pricing discussed?
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Match each pricing strategy to its description:
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Absorption target pricing focuses solely on competitor pricing.
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In variable pricing, what happens to prices when supply is low?
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Study Notes
Variable Pricing
- Flexible pricing strategy based on supply and demand
- Lower prices when needing to quickly sell excess inventory (e.g., expiring products)
- Raise prices when demand is high or supply is low
Price Differentiation
- Charging different prices for the same product in different markets
- Possible markets include different countries, demographics, or types of buyers
- Requires customers being unaware or unconcerned about price variations
- Requires barriers to entry, like tariffs or laws, to prevent consumers/competitors from purchasing the product in cheaper markets
Absorption Target Pricing
- Sets price to cover variable costs, absorb fixed costs, and achieve a desired profit based on sales estimates
- Formula: Absorption Target Price = Variable Cost + Fixed Cost + Net Profit
- Example: A business selling 100 chairs at 20variablecost,20 variable cost, 20variablecost,1000 fixed costs, and a target net profit of 3,400resultsinanAbsorptionTargetPriceof3,400 results in an Absorption Target Price of 3,400resultsinanAbsorptionTargetPriceof64
Marginal Cost Pricing
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Short-term strategy where price is set based on the cost of each additional unit, which may be higher or lower than the average cost
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Focuses on the cost of producing one extra unit
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Two primary situations:
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Unused production capacity: Reduces price to near variable cost to utilize existing resources
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Increased cost for supplying an extra unit: May increase price due to higher costs for additional units
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Examples:
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Reducing the price of oranges nearing their expiration date (variable pricing)
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Filling empty seats on an airplane before departure (unused capacity)
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Increasing the price of bottles to a customer who needs last-minute additional orders beyond their typical bulk order (increased cost)
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Description
This quiz covers various pricing strategies including variable pricing, price differentiation, and absorption target pricing. Understand how different approaches to pricing can impact sales and profit margins in a business context.